Prime Minister Kevin Rudd’s lengthy essay on “The Global Financial Crisis”, in the February issue of the Monthly, blames the international economic crisis on neoliberalism. “The current crisis”, he writes, “is the culmination of a 30-year domination of economic policy by a free-market ideology that has been variously called neo-liberalism, economic liberalism, economic fundamentalism, Thatcherism of the Washington Consensus.” He adds: “... the great neo-liberal experiment of the past 30 years has failed ... neoliberalism, and the free-market fundamentalism it has produced, has been revealed as little more than personal greed dressed up as an economic philosophy.”
Since neoliberalism has failed, Rudd argues, it falls to the ALP and other social democratic parties around the world “to save capitalism from itself”. To do this, “social democrats will draw in part on a long-standing Keynesian tradition”. It all sounds as though the world capitalist economy would be in perfect health if only economists and governments hadn’t been seduced by a false ideology three decades ago. This is idealist nonsense on a par with saying that World War II occurred because Hitler was psychotic. Major economic events like the present world slump are caused by powerful socio-economic forces, not by mistaken ideologies, which at most affect the particular form that big events take.
Economic crisis and Keynes
Capitalism has an in-built tendency to fall into economic crises. These crises can take a number of different forms, but the most common is a recession caused by overproduction. In their drive to increase profits, companies produce more than they can sell at a profit. Capitalist economic prescriptions such as neoliberalism and Keynesianism can modify some details of these crises, but they can’t prevent them.
It is noteworthy that Rudd’s lengthy essay never attempts to explain why neoliberalism became dominant among capitalist economists in the late 1970s. To understand this, it is necessary to recall the previous half century’s economic course. Rudd, still with the “good ideas/bad ideas” view of history, asserts that US President Franklin Delano Roosevelt and his New Deal “rebuil[t] American capitalism after the Depression” of the 1930s, and that the US Democratic Party re-established the basis for a “healthy” world capitalist economy after World War II.
In reality, neither the US nor the rest of the capitalist world emerged from the long depression of the 1930s as a result of anyone’s economic theory. What revived the capitalist economy was World War II, which brought massive guaranteed sales at a profit (for weapons) and – in Germany and Japan – huge destruction of factories and infrastructure, which both provided a demand for new producer goods and reduced the amount of capital required in order to exploit workers’ labour. This destruction and the political defeats suffered by the workers’ movement internationally (fascism and wartime austerity) allowed a big rise in the average rate of profit.
Keynesianism’s failure
It was these profound changes, not economic theory, that allowed capitalism a new period of sustained growth. But British economist John Maynard Keynes claimed in the 1930s to have found a recipe to make this capitalist growth permanent, without the periodic crashes that capitalism had always previously experienced. Basically, Keynes argued that, at the beginning of an economic slump, when effective demand begins to decline, governments should pump up demand through deficit spending. This would stop the downward spiral in which declining demand causes falls in investment and employment, which further reduce demand. Increasing spending power in this way, Keynes said, would allow “normal” production to resume, at which point governments would run a budget surplus to soak up the excess money they had previously thrown into the economy. Proper policy would ensure steady non-inflationary growth.
How could such a brilliant scheme lose out to neoliberalism’s “greed dressed up as an economic philosophy”? The answer is quite simple: Keynesianism never delivered as promised. Governments following Keynesian recipes soon discovered that they didn’t quite work. If, during the upturn, they tried to take out of the economy all of the extra money they had thrown in during the downturn, the downturn threatened to return early and with a vengeance. So, virtually everywhere, Keynesianism was inflationary.
At first, the capitalists didn’t mind this. Inflation initially was relatively low and predictable, and it helped them to reduce the real wages of their workers by stealth. But as time passed, each new downturn required more deficit spending to stop it becoming a deep and severe recession (a “depression”), and there were fewer and fewer opportunities to run surplus budgets. As a result, the rate of inflation kept increasing, while developed capitalist economies got slower and slower. Someone invented a term for this global combination: “stagflation”, from “stagnation” plus “inflation”.
Then, in 1974-75, stagflation tipped over the edge into an international recession. It showed that the underlying contradictions of capitalism hadn’t gone on holiday; capitalist prosperity still led to crises of overproduction. Keynes’ supposed cure for recession had resulted in something even worse: recession combined with chronic inflation. That’s when neoliberalism became popular with governments and their economic gurus.
We have been experiencing the neoliberal recipe for most of the last 30 years. It sought to protect capitalist profits by a more open and aggressive attack on working people’s living standards, in particular by slashing social welfare programs that might compensate workers to some extent for the inadequacy of their individual wage. Privatising education, health care and other such programs also provided capitalists with new opportunities from which to extract profits, opportunities they needed because existing industries were already suffering permanent overproduction – manifested as intractable unutilised capacity.
ALP neoliberalism
Some of the pro-capitalist academics who discuss these schemes for rescuing capitalism may believe their theories. Among the capitalist politicians who try to implement them, perhaps a few of the more naive take them seriously to some extent. But for most politicians, these supposedly conflicting ideologies serve primarily to help convince voters that the politicians are doing the right thing when they do whatever it is they think will make their capitalist masters happy. Few of them are really embedded in one camp or the other (although their public image may seem so). The Keynesian PM, to counter too high inflation, experiments with a bit of fiscal contraction. The neoliberal PM, worried by slumping production, tries a bit of “pump priming”. (In 1987, when there was a sudden drastic fall in stock markets, Ronald Reagan, the arch-neoliberal US president, gave the US the biggest dose of Keynesian deficit spending the world had seen to that point.)
Rudd’s article tries to obscure this reality by pretending that the Hawke-Keating ALP government bucked the neoliberal trend by instituting “an effective regulatory framework which manages risk, corrects market failures, funds and provides public goods, and pursues social equity”. That is nothing but puffery: Hawke and Keating followed essentially the same economic policies as the Fraser government that preceded them. (And Keating preceded Howard in trying to introduce a GST.)
They even called what they were doing “economic rationalism” – one of the widely used terms for neoliberalism that Rudd forgot to include in his list, quoted at the beginning of this article. (And he may not be doing it quite so often now, but Rudd not very long ago was emphasising that he is an “economic conservative” – another synonym for neoliberalism that didn’t make it into the list.) Furthermore, not even Rudd has the gall to pretend that the state Labor governments over the last 30 years have been anything but neoliberal; he is careful not to mention them.
The only really honest statement in Rudd’s article is his admission that he sees his job as “saving capitalism from itself”. But that can be done only if working people can be persuaded or forced to pay the costs – and, in the face of the global capitalist financial crisis, the costs will be huge. Since European settlement, Australia has had any number of political parties seeking to advance, or rescue, capitalism, and that is what has brought us to the current mess. Surely it is past time for working people to create a party that seeks to overthrow it.